What is a tax-exempt organization
Non Profit organizations who engage in social causes popularly referred to as NGO’s are afforded tax exemption under the Income Tax Act, 1961. These organizations are legally constructed as Trusts, Societies or Section 8 Companies under The Companies Act 2013. However, not all nonprofits can automatically be eligible for tax exemption. There are many rules and criteria based on which they need to qualify to obtain a tax exemption registration, which is accorded under Sec 12A of The Income Tax Act. What these rules, criteria, and procedure to apply for tax exemption is detailed in the sections that follow.
Tax Exemption – Only for NGO’s engaged in a Charitable Activities
The first and most important question to be raised and addressed is if your social cause is a Charitable activity as defined under Section 2(15) of The Income Tax Act. However, noble your cause may be, if it does not fit into Sec 2(15), you may not qualify for tax exemption.
There are 6 specific causes plus 1 omnibus clause termed as an object of general public utility which is considered as Charitable activities. These 7 causes are listed below.
1. Relief of the poor
4. Medical relief
5. Preservation of environment (including watersheds, forests, and wildlife)
6. Preservation of monuments or places or objects of artistic or historic interest and
7. Any other object of general public utility
Questions on what exactly does relief to the poor mean or medical relief or education or object of general public utility mean? These matters though not spelled out in the Income Tax Act are to be interpreted through the body of commentaries and case laws which have made interpretations and set precedence’s which become the guiding light from which to examine each case on its facts and individual merit. For example, a Trust running a school for poor children and registered with the Education Department of the State and running a recognized course like SSLC or CBSE would qualify as “education”. While a private training center or franchisee of say Byju’s may not qualify as “education” for a few reasons, the legal structure of for-profit and no formal recognition nor for the lower income groups.
Likewise, a think tank on economic policies, public policies, foreign policies, sector-based policies doing research, publications, conducting events, etc may qualify as an object of general public utility. However, if the same organization is also involved in politics or lobbying, holding on to the charitable status may be contentious as now there is a strain of vested objectives.
Read Also, Form 10A
What are the documents required for applying for registration
The process for applying for 12A registration and filing of Form 10A has been made online with the digital signature of the signatory.
As per the CBDT Notification No.10/2018 dated 19.02.2018 and Amended Rule 17A, to obtain 12A Registration, the Application for registration u/s 12A has to be made electronically online in Form 10A to the Commissioner of Income Tax by the charitable or religious trusts
• Form No.10A shall be furnished electronically and accompanied by the following documents. Know More
- Company Info and charitable activities it conducts:
1. Note on the activities of the trust or institution – In this a brief note on the background of the Organisation, what are the vision and mission of the Organisation, charitable activities undertaken or to be undertaken and it’s a social impact.
2. Evidence of welfare activities carried out & Progress Report since inception – A list of activities or event carried out by the Organisation along with supporting documents such as images of the event or activities, detailed reports of events such as date and time of the event, place, number of delegates, speakers or Chief Guest attended in the event or a newsletters or publications of the organisations, if any.
- Charter documents:
1. where the trust is created, or the institution is established, under an instrument, a self-certified copy of the instrument creating the trust or establishing the institution;
2. where the trust is created, or the institution is established, otherwise than under an instrument, the self-certified copy of the document evidencing the creation of the trust, or establishment of the institution
3. self-certified copy of registration with Registrar of Companies or Registrar of Firms Societies or Registrar of Public Trusts etc.
4. PAN copy
- Modifications, if any in the Charter documents – a self-certified copy of the documents evidencing adoption or modification of the objects, if any;
- Financial Statements – where the trust or institution has been in existence during any year or years prior to the financial year in which the application for registration is made, self-certified copies of the annual accounts of the trust or institution relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up
- Address Proof – Supporting documents of communication address – Such as rental agreement copy, NOC from Landlord or property tax receipts.
- Eligibility to Apply for 80G – a self-certified copy of existing order granting registration under section 12A or section 12AA, as the case may be; and
A self-certified copy of the order of rejection of an application for grant of registration under section 12A or section 12AA, as the case may be if any.
How long does it take to get a 12A certificate
If the Income Tax Commissioner is satisfied with the application, then he/she will pass an order in writing registering the Trust or Institution under 12A of the Income Tax Act. In case the Commissioner is not satisfied with the application, then he/she can also pass an order in writing refusing to register the Trust or Institution. Order granting or refusing registration shall be passed before the expiry of six months from the end of the month in which application was received under section 12A.
As per section 12AA(2), Every order granting or refusing registration shall be passed before the expiry of six months from the end of the month in which the application was received.
Deemed to have been Registered – The Supreme Court on February 16, 2016, held in the case of CIT vs. Society for the Promotion of Education, Adventure Sport and Conservation of Environment. As per section 12AA, Non-disposal of an application for registration before the expiry of six months as provided u/s 12AA (2) results in the deemed grant of registration”
Whether there is a validity period for the certificate granted
No, once the registration is granted, it will hold good till the cancellation of registration. Cancellation of registration can be done voluntary by the charitable organization or the tax department for non-compliance with its terms and conditions.
Can the department cancel the registration certificate granted
Yes, registration granted u/s 12A can be canceled in below circumstances:
• The activities of such trust or institution are not genuine.
• The activities are not being carried out in accordance with the objects of the trust or institution.
• Trust’s income does not endure for the benefit of the general public.
• It is for the benefit of any particular religious community or caste.
• Any income or property of trust is applied for the benefit of specified persons like the author of trust, trustees, etc.
• Its funds are invested in prohibited modes.
“It is however provided that registration will not be canceled if the trust institution proves that there was reasonable cause for carrying out activities in said manner.”
Also Read, Note on Governance and Sub Committees
Charter documents are the important documents of any charitable organization and these documents are reviewed in detail by the tax office before considering grant of tax-exempt registration.
Objects clause – should spell out clearly the social cause and ought to fit into any one of the 7 causes under Sec 2(15).
Investment clause – Surplus fund can only be placed in specified Banks and instruments as defined under Sec 11(5). Els, it would be considered a diversion of public funds.
Right to Amend – Certain key clauses which if modified would lead to changing the public office, or public goods/services character or introduces a vested interest is to be irrevocably made unalterable unless there is prior permission of any such proposed change taken from the Income Tax Department.
Dissolution – Should such an NGO require to be dissolved a clause to be introduced that all such property to be parted to any similar NGO with similar objects as the dissolving one so that the public funds and properties are utilized only for the purposes for which it was raised.
Irrevocability clause – This clause is to prevent an NGO obtaining a tax exemption and thereafter making amendments to its objects, beneficiaries, control and management subverting post facto the tax exempt status granted to it.
Beneficiary – The charter document to be drafted wherein it should be clear that it is the general public and not any denomination of it by religion, caste, creed, etc.
Utilization – Funds raised by the NGO to be utilized only for it’s stated objects and the donor’s instructions and not diverted away.
Area of operation– An important caveat for obtaining tax exemption is that the field of social cause needs to be to the territory of India.
The tax-exempt status of any NGO is based on it’s Sec 12A registration which confers on it a Charitable status and is a pre-requisite to seek an 80G Registration wherein the Donor can avail of a tax benefit for his contribution. Should your NGO’s charitable activities be also covered under Schedule VII of The Companies Act which defines activities under CSR (Corporate Social Responsibility) then CSR funds can be raised by the NGO even in the absence of an 80G Registration.
Also read, Plugging the Corpus loophole – Budget 2017